Premium
Government Spending and the Taylor Principle
Author(s) -
NATVIK GISLE JAMES
Publication year - 2009
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2008.00187.x
Subject(s) - indeterminacy (philosophy) , economics , consumption (sociology) , scope (computer science) , private consumption , government (linguistics) , government spending , new keynesian economics , keynesian economics , fiscal policy , uniqueness , macroeconomics , public finance , overlapping generations model , public economics , monetary economics , monetary policy , market economy , welfare , law , political science , social science , linguistics , philosophy , physics , quantum mechanics , sociology , computer science , programming language
This paper explores how government size affects the scope for equilibrium indeterminacy in a New Keynesian economy, where part of the population live hand‐to‐mouth. The main result is that a higher level of public consumption is likely to generate indeterminacy and render the Taylor principle insufficient as criterion for equilibrium uniqueness. This holds even though fiscal policy serves to reduce swings in current income. Only if government consumption is a substitute for private consumption, will it narrow the scope for indeterminacy. Hence monetary policy should be conducted with an eye to the amount and composition of government consumption.